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Short Sales - Are they for you?

Published On: January 14, 2011

In our economy, for the first time in many years, many homeowners owe more on their homes than they are worth. This process began when current homeowners bought their homes in a market that had been escalating for years in an upward trend, and at some point there was a correction in pricing. Other factors contirbuted to this condition as well, such as unemployment, fuel prices, bond markets, and financial failures. The results were many foreclosure properties, and this brought down the average price of all homes.

 Let's put it this way. If you had 4 homes that have a price of $200,000 fair market value, but one of these homes goes into foreclosure. That foreclosed home eventually sells for $140,000. The average appraised value of ALL of the homes now is $185,000 (total value divided by the number of homes, ie 740,000 / 4 = $185,000). In this scenario, each of the remaining homes LOST $15,000 of value, due to the one foreclosed property.

In today's market, we have many foreclosed properties, and this has taken it's toll in value of all homes. This has led to most homeowners being "upside down" on their value of their home in accordance to what they owe on the home.

Banking institutions loose a lot of money on foreclosures, and "Short Sales" are a solutions that can benefit the homeowner, and the financial institutions.

A brief description of what a Short Sale is, would be that a financial institution will take less to release a lien on a property that is tied to a mortgage for the  homeowner, than what is currently owed on the home. The benefit to the financial institution is that they loose less money than if the proeprty were to be foreclosed upon, and the seller of the home would beneift because they aviod foreclosure, and often bankruptcy.

This process is not without risk. Short Sales are complicated and very time consuming. The "loss" that the financial institution takes generally is written off, but the seller usually receives a 1099 tax form at the year end for "gain", or the difference in the amount of the payoff, and the sale.

Short Sales also have many variables, such as multiple mortgages, inexperienced processors with the financial institutions, and generally lots of time on the phone and internet.

Short Sales are also different in that the pricing of the house is established at market value, which is usually many thousands of dollars less than what homeowners perceive the value of their homes to be. It is generally a "shock" to many homeowners of what the true market value of their homes are, in today's market. In most cases, no money will be sent to the homeowners when the property sells, and there are some costs related to a short sale to the homeowner.

Most Real Estate Companies charge a fee to initiate a Short Sale, because of the extreme amount of time it takes to get a short sale done. These fees are generally paid up front, and are considered "earned" when the process begins. These fees generally range from hundreds of dollars to thousands of dollars, depending on the brokerage initiating the Short Sale. These fees are not commissions, but origination fees charged by the companies for the actual manhours involved in the process.

The timing of the short sales is another issue for a lot of people. When an offer is submiitted on a regular home, the usual response time can be as little as a couple of hours, to a couple of days. In one of these sales (normal sale), a "closing" takes place in 30-60 days. In a short sale process, the timing can be anywhere from 4-12 months or longer to "close the sale". This uncertainty makes many perspective homebuyers to move on, and loose patience.

Patience is needed when originating a Short Sale, and the homeowner, REALTOR or REALTORS, and financial insitutions work together as a team to make the short sale work. Usually there is no negotiating in price from the original listing price, as it is "market value". The financial institutions reign supreme in acceptance or denial of all offers, and the protocol for each financial institution is different. Homeowners are generally responsible for taxes, insurance, and HOA or POA during the period of the short sale.

Although it is conceivable for a property sale to be completed without a REALTOR, the chances of this happening are very small, as one of the requirements of the Short Sale is that the property be actively listed for a minimum of 91 days with a Real Estate Agency. Commissions are set by the brokerage, and are paid out of the proceeds of the short sale, so the cost to homeowners for this service is minimal.

Attitudes also play a role in determining if a Short Sale is successful or not. A negative attitude dooms the process from the beginning, and even a positive attitude can be stressed during the process, due to the longevitiy of the sale, and the ever changing demands of the financial institutions.

Is a short sale the answer for you? My advise is to consult an expert in the field that is a FULL TIME REALTOR with experience in Short Sales. It takes hundred of hours, and major cooperation from many people to make a short sale work, but this is the tool that banks and homeowners alike have found that works for them.

Short Sales will make up as much as 40% of the market in 2011, depending on many variables and market conditions. Consulting with a Brokerage that specializes in helping homeowners through this process is mandatory in making it successful.

Does a Short Sale affect your credit? A lot of this will depend upon the financial institution and how they report it to the credit agencies. Often, the report will say something like "Paid off short of full account balance", and this report will make a "ding" on the credit report, but not with near the severity of a bankruptcy, judgement, or foreclosure. Generally speaking, a person that goes through a short sale may be considered plausible to buy again within 3-5 years. This timing could change, depending on lending critieria, government regulations, and market conditions.

If you are a buyer, most short sales cater to homeowners, vs. investors. There are cases where invesotrs may buy short sales, but owner occupied offers generally have priority over investor offers.

Short Sales must also be "Arms-Length Transactions". This means that parties cannot come together and make arrangements to buy a house for a homeowner and then owner finance the home back to them. There are also lots of other area's that can be considered as conflicts of interest in these sales. In general, "Arms Length" means that an agreement has not been made with anyone about a home sale prior to the time it goes on the market, and that the seller does not have a business or financial arrangement with a buyer that is unknown to the financial institution.

If you are considering a Short Sale, or need additional information on this topic, you can reach me at Dennis.Bane@Century21.com

Dennis Bane is the Principal Broker / Owner for Century 21 Franchises in the New River Valley of Virginia. He is an experienced Broker in Short Sales, and has handled multiple Short Sales closings. Dennis leads training exercizes with his agents, and public information meetings at various times during the year. There are currently 2 scheduled seminars on Short Sales scheduled in 2011, and you may e-mail Dennis for time and place reservations.

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